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Types of mortgage: which is right for you?

Ocean financial services

There are hundreds of mortgages out there, and the choice may seem bewildering. So the first thing you need to do is decide which type of mortgage would suit you best. Of course, our expert team will be happy to discuss that with you; but meanwhile, here's a brief outline of the five main choices available to you . . . 

Repayment mortgages

With a repayment mortgage, each of your monthly payments covers some of the borrowed capital and some of the interest payable on it. At the end of the mortgage term, you'll have paid back everything you owe and you'll own the property outright.

Of course, you may move within the term of your mortgage. If so, you may want to take your mortgage with you to your new home (which is known as "porting" your mortgage), and most lenders allow you to do this. 

Or you can repay the original loan from the proceeds of your sale, and take out another mortgage for your new home. 

A good option if . . . you want the clarity and simplicity of knowing your home will belong to you when you finish paying off the mortgage. 

Interest-only mortgages

With an interest-only loan, your monthly payments cover just the interest on your loan - leaving the capital sum borrowed to be paid off at the end of the mortgage term, with money you've saved elsewhere. 

The advantage, of course, is that your monthly payments will be lower than with other types of mortgage. 

But it's a big commitment. It means you need to feel confident when you take out your mortgage, that by the end of the agreed term, you will have saved enough to pay off the entire amount. 

If you are unable to do so, you may have to sell the house to pay off the mortgage. And in some cases, lenders may insist you show them how you intend to repay the loan.

A good option if . . . you want to keep your monthly repayments as low as possible, and feel sure you'll be able to pay off the loan at the end of the mortgage term. 

Fixed-rate mortgages

Fixed-rate mortgages are very popular, particularly with first time buyers. 

Your mortgage rate is fixed for an agreed period - usually two, three or five years - so you'll know exactly how much you'll be paying each month for that length of time, regardless of what happens to interest rates. 

The downside is that if interest rates go down, your rate of interest will remain fixed and will not reduce. 

If that happens, and you want to get out of a fixed-rate mortgage, you can - but you'll have to pay an early repayment charge to pay for switching before the end of the agreed period.

What happens when the fixed-rate period ends? You'll automatically go onto your lender's standard variable rate (SVR) - which will probably be higher than the fixed rate you have been paying. If so, you may decide to apply for another fixed rate deal.

A good option if . . . you want to budget and know exactly how much your monthly mortgage payments will be, over the next few years. 

Variable-rate mortgages

All lenders offer a standard variable rate (SVR) mortgage - which means the interest rate goes up and down as mortgage rates change. 

Mortgage rates are partly influenced by the Bank of England base rate, but they can also be affected by other factors. 

So the interest rate you pay on a variable-rate mortgage could change without the Bank of England base rate changing - and similarly, the base rate might come down while your mortgage rate stays the same.

A good option if . . . we find an attractively low rate, but you would be able to pay more (potentially much more) if interest rates go up. 

Tracker mortgages

Tracker mortgages follow a nominated interest rate, usually the Bank of England base rate. 

The interest rate you'll pay will be a set margin above or below the base rate - and when the base rate goes up or down, your interest rate will change by the same amount. 

Some lenders set a minimum rate, which your interest can't fall below. But there will be no limit to how high it can go.

Like a fixed-rate mortgage, a tracker deal usually lasts for an agreed period of 3 or 5 years - at the end of which, you'll usually be moved to your lender's variable-rate mortgage. 

A good option if . . . you believe that interest rates will go down over a certain period, but can afford to pay more if they go up. 

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